Professional Documents
Culture Documents
Articles 1572 To 1576
Articles 1572 To 1576
Auditing
Subsidiaries, Remote
Operating Units and
Joint Ventures
✗This chapter discusses about specific practical
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Introduction
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✗ Subsidiary
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• The role of the top management to provide leadership, inspiration and direction to
the lower level people in an organization in order to achieve the necessary
performance standards.
• This presupposes that the specified goals and execution measures have been
established, agreed, and precisely communicated to those affected.
• The roles and responsibilities of group and subsidiary management will need to be
defined and clear policies generated.
The extent of which the functions are devolved to the subsidiary and remote
units vary. The top management will have to decide what business aspects
remain the prerogative of the centre; for example, these could include:
approving budgets
setting production schedules
reviewing divisional strategies
allocating capital resources
Responsibility for research and development
defining standards
appointing divisional managers.
The systematic review and assessment of the controls and measures
in place both to:
✗ Local language
✗ Legislative considerations
Primary concern of the audit manager
- How he/she can ensure that the time spent during the
audit visit is productive and focused upon the appropriate
things.
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• Conducting high level review of the operation are more practical in the
case of an overseas operation where the associated travelling and
accommodation costs may prevent the audit visits, especially where
audit management are keen to ensure that any review time spent on site
is productive and not used to gather background facts.
• If the responses were to be completed by local management, they
would obviously require some guidance as to the purpose of the process
and the type and level of information required.
• Audit management also has the option to use the fact finding program
to bring together a wide range of relevant facts about the nature and
type of business operation being considered for an audit review.
• However, the additional use of the high level program approach can
provide yet further insight into the underlying quality and effectiveness
of management within the business.
JOINT
VENTURE
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JOINT VENTURE
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• Any organization must be alert to commercial opportunities that either
support their objectives or have the potential to profitably exploit new
areas. The maintenance of strategic and competitive advantage will drive
organizations to seek new, improved, alternative and innovative ways of
doing business. The search for such expansion opportunities may indeed
be driven by the simple and basic expediency of ensuring the continued
survival of the entity.
• In some instances the cost of entering a new market area can be
prohibitive and there may be other entry barriers to surmount.
•Where another organization has developed either a specific area of
expertise or a market presence in a particular business operation, it may be
more worthwhile considering a formal alliance with them, rather than
struggle to enter the same marketplace singlehandedly.
The nature of joint venture exercises can vary, for example:
• The co-ownership of a separate new company, operated and owned by all the
parties;
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Advantages of Joint Venture
Economies of scale
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✗ Disadvantages of Joint Venture
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Wider economic factors will also have an effect on the market for joint
venture exercises. Whenever the general or national economy is under
pressure and trading conditions are affected, it may be more prudent for
businesses to cooperate on joint ventures.
The nature and form of international trading relationships may become
important to an organization’s survival strategy; for example, the opening
up of the European market will give companies operating in different
countries further opportunities for cooperative ventures while drawing on
local market a familiarity with diverse national business practices.
However, involvement in international joint ventures does present additional
potential problems, such as:
• Localized business practices, laws, ethics, accounting standards, taxation and other regulations
• The prevailing economic and political circumstances
• Problems associated with time zone differences
• Difficulties concerning languages
• Currency and foreign exchange implications;
• internal auditors will be particularly interested in the role played by statutory auditors in overseas
locations and the extent to which cooperation can be expected.
On the global business stage, there have been significant developments which
could influence the general environment for joint venture relationships. The break-
up of the former Soviet Union may offer western businesses trading and
development opportunities with local partners, who have an appreciation of the
emerging economic situation but perhaps lack the necessary skills and leading edge
techniques to exploit their potential.
When considering joint ventures, managements are faced with
fundamental questions about levels of investment, involvement,
ownership, responsibility and control.
It is crucial for any organization to have a defined strategic plan
which maps out the future development and growth of the
business. All the day-to-day activities of the organization should be
linked to the agreed strategic plan, and this includes the role to be
played by joint ventures.
In the establishment of any relationship, it is easy to become
distracted from the real issues and to lose a sense of informed realism.
This may be because the parties view their contribution as but one part of
the whole, and unless the roles and responsibilities of each participant are
clearly defined, there is the danger that some issues will fall between the
ensuing cracks.
In the commercial world, joint business ventures are essentially
partnerships of effort bound by contractual obligations and rights, but
there can be a real chasm of difference between the high level business
objectives and the detailed reality of the situation on the ground. One
solution is to define the requirements for regular meetings and the
exchange of significant information about the venture and its progress.
Once the venture is up and running, its day-to-day operations are potentially
influenced by all the different factors affecting all the partners. Some of these
forces may either have implications for the joint venture or potentially have
simultaneous effects for all the parties to the joint venture. Lines of
communication and planning should be flexible enough to enable a prompt
response to such events, so as to ensure that the possible effects on the venture are
communicated, understood and adequately reacted to.
In common with all business activities, management involved in joint
ventures will need to ensure that controls form part of the target environment in
order that investments in capital, resources and time are duly protected. The
stance taken on internal control within joint ventures will depend, in part, on the
attitudes to corporate governance and accountability that prevail in the partners’
business environment, especially where they are overseas partners operating in
different national arenas.
If the basis of the joint venture is predominantly entrepreneurial in nature,
there could be implied resistance to the application of too much control.
The need for incorporating internal control into the joint venture may be seen
(especially by internal auditors) as self-evident; however, as in all operations there
must be a realistic balance drawn between providing adequate, effective control
and avoiding burdensome or suffocating control levels.
The Internal
Audit Role in
Joint Ventures
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Where both (or all) parties to a joint venture arrangement have their
own internal auditing functions, it will, at least, be necessary to ensure
adequate cooperation and coordination of internal audit review
activities.
Internal auditors in one organization should have a fundamental right
of access to the records, premises and staff of the venture partners.
Such access rights should clearly be defined in the contractual agreements
and any definitions of auditing scope and timing should also be incorporated.
The driving criteria for internal audit assessment of the joint venture
operations will be to assure management that appropriate control activities are in
place and that they are effective in protecting the organization’s investment and
interests.
Internal audit management will need to maintain an up-to-date awareness of
the general business plans for their organization, so that they can anticipate the
implications for audit planning and establish the foundation of audit
assignments in the future.
The chief internal auditor (or director of auditing) will need to consider the
risks associated with the proposed joint venture(s) and agree with management
the scope, extent and timing of any proposed audit involvement.
✗ When assessing the relative significance of the proposed venture,
audit management should take into account the following prime
factors:
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It will be necessary to develop an audit strategy and plan for assessing the venture which is
linked to the implementation timetable and designed to intermesh with the key stages of the
project so that the auditor’s contribution and impact are maximized.
It could strongly be argued that internal audit involvement at the inception of a joint venture
relationship should ensure that adequate attention is paid to matters of internal control and
accountability. Whereas auditors should always avoid taking over the prime responsibility of
management in matters of control, their involvement at this early stage can, at least, ensure
that control is considered as an important issue.
As the negotiations progress and policies, responsibilities and procedures
start to emerge, it is proper for auditors to review these outputs and comment on
them from a control standpoint.
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